A lot of experts agree that the next recession is not a matter of ‘if,’ but a matter of ‘when.’ During trying times, making sure your credit profile is protected as early as possible poses no harm and allows you to reap all the benefits it has to offer. Merrill Chandler gives a subtle reminder of what occurred during the previous recession and shares the development and what to expect from FICO on the move forward. He places emphasis on the importance of knowing what behaviors are being monitored when it comes to credit and explains the impacts of each. In this episode, learn specific and working strategies on how you can protect yourself and your assets before worse becomes worst.
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How To Prepare Your Fundability For A Recession
We’re going to be discussing how to recession-proof your credit profile and your borrower profile. The credit profile is technically what you can read in your consumer disclosures in your credit report. We recommend myFICO.com because it has 28 consumer borrower facing scores. A borrower profile is a little bit bigger than that. We’re going to be discussing topics from each one of them. Why do I say recession-proof? I don’t know if you were around during 2008, 2007, the whole run up the values of real estate mortgages. If you could fog a mirror, they were giving out mortgages. The problem was in 2008, all of a sudden, there became too many of the mortgage-backed securities.
You’ve seen the little sand art. There’s liquid and sand. You turn it on its spindle and all of a sudden, the bottom starts falling out. The mortgage crisis wasn’t beautiful, but it makes all of these beautiful little designs as the bottom sand particles start moving down through the liquid and ultimately everything collapses. If you’ve seen those, you know what I’m talking about. The entire bottom fell out of the mortgages because they put frosting on shit. Some described it as lipstick on a pig, but they were saying that mortgages were a paper when in fact the tranche, the collection of that grade, had enough a paper to pass muster.
People with 500 credit scores and no job, they’re ninja loans, no income, no job or assets. Remember I’ve been doing this for many years since 1992. Banks are mortgage bankers. They’re security bankers. They’re retail bankers. They are credit card issuers. They did all of the things necessary to protect their interests from loss. What is it they’re trying to protect themselves from? Borrower behavior dictates that when the economy suffers, people lose their jobs. They’re going to use every resource to feed their families. They’re going to use every resource to stay in their mortgages, pay their bills, do everything they can to keep some degree of normalcy.
This is totally expected behavior. Lenders with FICO assisting them, they contract. If you have a $20,000 credit card or a credit line, business cards, business lines, it doesn’t matter. Let’s say you have a $20,000. They are likely to either reduce that limit or close the account. Why? Because they want you to pay back the money that you borrowed, but they don’t want to let you use that money anymore because of the likelihood of you using that money. You lose your job. You use that money to do things that credit was not designed to do or the things that they don’t want you doing with your credit cards, paying bills, buying food as part to get rewards and points, no harm, no foul.
In a recession, they’re going to contract and say, “You don’t get to use credit because you don’t have a job. You don’t get to use our money.” Remember that in the bootcamp, all my Funding Hackers out there, everybody who’s read the book and you are many Funding Hackers because you get to deep dive in a bunch of these concepts. Every one of you that have gone through one of the training, etc., learn that borrower behaviors are trackable at every step. Lenders know from time immemorial that you’re going to use available credit to save your skins.
Lenders know that you’re going to save your skins with credit. As we learned in the bootcamp, they know it’s their money. I’m going to presuppose we all have a good heart. We’re not trying to gain the system. We believe that we’re going to feed our families because we’re going to get a new job, times are rough and our spouse hasn’t been laid off yet or our children are working and they’re throwing in. We were creditworthy. Because we’re creditworthy, we in the back of our minds believe this money is ours.Lenders know from time immemorial that you're going to use available credit to save your skins. Click To Tweet
Lenders don’t believe that for a second. They don’t spend a second believing that money is yours. What they do is in times of recession, in times of economic collapse, in these times, they don’t want you to have access to their money because you’re going to be using it to survive rather than make money. Bankruptcies went through the roof. Defaults went through the roof because many of our fellow citizens went bankrupt. They lost their jobs. They lost everything. We’re going to discuss in this episode how to send the right kinds of messages to minimize those contractions on your account or completely eliminate them.
Financial Score Stress Indicator
The first thing I want to talk about is FICO 2019. Because I was a CEO, I was able to attend a high-level, for executives. I’m not a programmer. I’m not a coder. They have classes and seminars for those, but I was seen as an executive. I was invited to be able to attend the executive, the strategic planning part of this. One of the vice presidents of FICO over Scores introduced something that they’re working on. I referred to this once before in a show, but it’s the FSSI, the Financial Score Stress Indicator.
Her presentation deck started out with this thing like, “Do you know which 680s are going to get through the recession?” We’re staying in touch with our liaison so as it’s developed, we get to at least learn more and more. It was barely on. It’s not even being tested yet. It’s being designed. In several months, at the next FICO, we’re going to find out what the next steps are. This stress indicator score is designed to say which of the people who have 680s because it happens to 720s, people with 760s and people with 800s. The risk begins at people with 680 or below because 680 isn’t a horrible score. It’s not super fundable. That’s their cutoff.
Sally was saying, “Which of the 680s can you trust?” That goes all the way up to your 800s. She finished her presentation. I was literally bolting out of there right after to stop and talk to her about borrower education and everything that I’m about. In this conversation, she said that they were barely starting the process, but it was designed for economic stress circumstances like a recession or a near depression. By the way, as a hint, you can be depressed emotionally in your soul and your psyche. Maybe I’ve been depressed, but I have been recessed.
I say I’m not in a depression. I’m in a recession for my personal psyche. The same thing happens to us, as can certain states go through this and definitely our economy. Lots of people say there’s going to be a reset. That’s a very simple, kind way of saying the rug might get pulled out from underneath us. In most markets, it’s true, in Salt Lake City. In most markets, the price of homes is 10% to 20% more than it was when everything failed. Most individuals predict there’s going to be some reset.
In that reset, I guarantee you that this FSS score is going to be in play or they’re going to use it to test the markets. You can stop the process of this contraction when it comes to you or significantly limit it. I can’t guarantee that we’ll stop it altogether. I went through this once in 2008. The rules of fundability are the rules of fundability. It didn’t start with 2008. We didn’t design everything because of this collapse. These are fundamentally sound financial principles.
Borrower Behavior Measurement
Let’s go through some of them. Now that I’ve introduced the financial stress indicator, we’ll be able to paint a picture of what this means to you over the next months and/or years. In the bootcamp, in my book, we talk about FICO and lender software, measuring your performance data. We call them borrower behaviors, but FICO and lenders call them internal performance data, internal to the lender. If you have a Chase card, if you have an American Express card, they measure your behavior.
The behavior that you exhibit is what’s going to determine whether or not they can trust you in a time of financial stress on a macro scale, on a country-wide scale. It doesn’t go into whether or not you are going to lose your job. We can’t predict various sectors are going to lose their jobs. For those of you who are the entrepreneurs, the real estate investors, the wild ones. The ones where we’re always out there pushing the boundaries, pushing the limits, as I’ve discussed in previous episodes and in my bootcamp, if you create a qualified fundable entity and that fundable entity has traction besides your W-2 or instead of your W-2, if you’ve done the right things, you’re sending markers and triggers to the software that says this is a professional borrower.
I’ve said those words, if you haven’t attended, go to the bootcamp, GetFundableBootcamp.com. We literally fill out paperwork and do worksheets on how fundable you are. In there, we find out what your tolerances are and the messages you’re sending with your revolving accounts and the messages you’re sending the lenders regarding your installment loans. If we send the right messages for long enough and we’re losing time now, remember, what’s the lookback period? Here’s a quick quiz. Shout it out too while you’re at the gym or while you’re walking down the street.
For 3, 6, 12 and 20 months, if you have not done these behaviors for a significant amount of time, you have a greater likelihood of having them lower your limits or close your accounts depending on how risky your behavior has been. Remember, if everything is fine and your behaviors are within tolerances, they’re going to continue still to collect your interest payments and/or let you use the card because your card swipes pay their bills. Everything is a target. There’s the bullseye, which is the true FICO 40, 24-month lookback period perfection with a perfect borrower identity and a perfect QFE identity.
Once you hit those targets, where we want to age those messages is a minimum of three months. Six months is nice. Twelve months is the bottom line that’s going to protect those limits and how we’re treated by lenders in case of stress. If you make it to that 24 months, and I don’t know when the reset is coming. If you come back and you have 24 months of spectacular behavior, of all the stuff we’ve already talked about, certain limits, 10% to 20% traffic, never more than 38% utilization on the reporting period, where you are paying fastidiously on the due date to zero.
You’re having auto-draft coming on that date. If you have 24 months of spectacular borrower behaviors, 1 of 2 things is going to happen. You’re not going to be caught with your balances up to and where you are upside down on an account. Let me tell you a story about numerous clients who were not implementing their other optimization plans. They were not being professional borrowers. One of them had a $15,000 limit out of a $20,000 account. They had not finished setting up some of their business things. They were not serious about setting up their QFE, Qualified Fundable Entity, which is the receptacle that lenders are willing to pour dollars into.A score of 680 isn't horrible. It's just not fundable. That's the cut off. Click To Tweet
I believe it was Wells Fargo lowered their limit from $20,000 to $10,000, but they had a $15,000 balance. They were upside down by 50% of their new limit. At FICO, one of our questions was, how do you account for lenders dropping a limit under their current balance? I understand lenders needing to protect their interests, but how do you account for it? Straight out of Ethan Dornhelm, the Chief Scientist at FICO, the Vice President, he said, “We don’t. If their new limit is beneath or lower than their reported balance, they are going to make the most significant hit that can come against an open positive reporting tradeline.”
It means that, even though this isn’t what happened, how the way the algorithm works is that you’re allowed $10,000 and you spent $15,000 50% above your allowable limit. You’re a bad borrower and crash the score, not just the score, but you completely trash your fundability. Rule number one to protect yourself in the recession, follow the traffic and utilization guidelines that we’ve presented in all the shows and find out about how fundable you are in the bootcamp so that you can apply this information to your entire profile.
Find out your fundability index so you can have actionable intel. The thing is 10% to 20% traffic on open credit cards, tier 1, 2 and 3 credit cards. Nevermore than 38% on the reporting period. We prefer 7% on the reporting period or on the reporting date. That’s it. One of two things, if they do reduce from $20,000 to $15,000, you change your behavior to match 10% to 20% of $15,000, not 10% to 20% of $20,000. You start aging that behavior with that new limit. If they give it to you, you look like gold. They’re going to be the ones that raise that limit after you’ve proven that you don’t need to use those funds.
We’re going to our emergency crash program because your borrower profile, I call it the goose that lays the golden egg, is the single greatest financial asset you have. You need not just to use it appropriately, keep your balances to zero, keep your reporting date to 7% and don’t put more traffic on it than 38% or 10% to 20% if you want to be in the bullseye. There’s that. Let’s talk about how to protect the asset. One of the things I coach, especially some of my ballet clients, and I work on myself as well as my children. I’ve taught this principle to every one of my children.
I’m going to share it with you and you decide whether it’s a thing or not. Some people put aside money for 1, 3, 6 months. I’m in Salt Lake City, the LDS people here, they have two years of food supply, etc. There’s radical and there are conservative versions of this. Most people I know will save money. When they save money, that’s in a bank account, mattress, your safe, wherever you put it. That money can be used for fixing the car or any other emergency. What I teach my clients, my students and live by for myself is I advance credits inside of a creditor.
Here’s what’s cool. I have experimented with the process of having credits inside of a mortgage. You are advanced payments because you can choose this, as we’ve discussed both in my book and in the bootcamp, you can advance payments. You can add more payments to your mortgage that don’t go in the end. It is six months’ worth of payments. You could stop making payments and they will use that credit with you. It’s like a savings account for every single lender that you’re working with. Cell phone bills, you can do. Electric, gas, all of your utilities, you put money on those accounts. Pay more than the bill is worth so that you get a minimum of three months.
I’m going with the FICO modeling of 3, 6 and 12 months. I don’t know if it’s necessary to go 24 months, but a minimum of three months of what your average cell phone bill is, what your utilities are, your mortgage payment, your auto payment or loan or lease, your credit cards so that you can charge them up, but they have a credit. This does not harm your credit profile because when they draft the account, they’re drafting it from credit. FICO is triggering on every single one of these. I don’t know that there are opportunities to get prepay as we talk in the bootcamp about auto loans where you well may earn prepaid points because you paid six months in advance.
Let’s take your auto loan, your mortgage or anything. You could get six months’ worth of savings on account, it’s called a credit, and you go back to paying your monthly payment. It always stays there for six months. If you show that you have six months on the average traffic because check your traffic, you’ve been putting traffic 10% to 20%, you know how much that is and you paid down to 7% for the reporting date and zeroed on the due date. If that money can come from a credit, you have basically prepared every single one of your credit accounts that report to your credit profile.
You have indicated positive borrower behaviors in relationship to every one of those lenders and you can even do this with your service providers. This money is still touchable. For example, if you need to fix the car, if there’s an emergency, you can run more traffic. I’m saying an emergency. You can run the traffic because you have credit. I want to do everything in my power. I want you to do everything in your power to continue to have six months’ worth of savings. Pocket-it away, squirreled away at every single one of your service providers and every single one of your lenders, especially those that report to your borrower profile.
The elegance of this is that you are now showing good faith. I always tell you what I know, what I don’t know and what dots that I connect. I do know that having six months’ worth of payments in advance allows you not to make a payment and still have a perfect history. It also continues to hit all of the underwriting guidelines for any future opportunities to raise the limit or get a loan or whatever. Since you bankrolled yourself with all these lenders, you can lose a job and still all of the bills that you would normally tap your credit accounts for are already paid month after month for a full six months, minimum of 3, 6 months, a year, whatever you have the ability to do.
I’m telling you no credit profile that I’m aware of has ever suffered and most that I have experienced firsthand or in my coaching have all excelled by doing this model. It is not a savings plan where you have access to the money. You are paying bills. You’re scared. You might be using your credit lines. You’re drawing down more money than you used to. If you have a credit with the credit cards, and this goes for business and personal, if you have credit with each one of those, you also have the ability to use more of that money.
They’re going to track your behaviors. They’re going to see what you’re using, but the payment comes from money that it’s on their books. The best way to avoid having negative indicators during a recession or having a contraction of your credit accounts is to hit the bullseye or that next outer ring on your traffic patterns that we’ve discussed in this podcast. Keep it there. If you’re going to play with something, play with it over on the business side. I still tell you in the build phase, on the business side, you still want to establish an awesome borrower lender relationship. The activities should stay the same over there, but they can be a little more liberal. If you have questions or otherwise, bring them with you to the bootcamp. Go to GetFundable.com. I’m happy to have me and my team address any ideas or thoughts about this episode or any episodes of the Get Fundable show.
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